Wednesday, March 20, 2013

Eurocrash: the cat and mouse wags the dog

In response to the Cypriot parliament rejection of the EU's "rescue" plan, Handelsblatt sounds almost baffled.

A tiny island, with the economic power about half the size of Bremen, it notes, is playing a game of cat and mouse with the second largest economic power in the world. By comparison, the GDP of the eurozone is more than 550 times as large as that of Cyprus.

Mixing metaphors outrageously, it then presents this cat and mouse player as the tail wagging the dog, nevertheless recoding the words of the chairman of the ruling party Disy, Averof Neofytou. He speaks openly of how critical the situation is, declaring: "We are on the verge of a disorderly bankruptcy".

Clearly struggling with the enormity of it all, Handelsblatt now has Cyprus racing "straight for the abyss". This, I suppose, is multi-tasking , while playing cat and mouse and wagging the dog, Cyprus also finds time to race for the abyss, although how it manages a straight path while doing so much else must remain a mystery.

And just in case you missed the impression that it was, the paper also tells you that the Cyprus crisis is getting worse, adding that the vote against the rescue is "a catastrophic political defeat for conservative president Nikos Anastasiadis".

The vote is far more catastrophic for the "colleagues" though. Having declared Cyprus of systemic importance, to let it now collapse is unthinkable. The disastrous effect on what is left of its own credibility, especially in relation to Spain and Italy, would be irrecoverable. Their word would no longer have any value at all.

For the moment, the island's economy is being kept afloat by the same mechanism which kept the wolf from the door – the so-called Emergency Liquidity Assistance (ELA). Beyond that, the "colleagues", famous for never having a "plan B", don't seem to have anything else on offer. No one has ever said "no" to them in such unequivocal terms.

But if they continue to insist on the compulsory levy, it would wreck the European principle of community and solidarity. Cyprus as a financial centre would be buried and destroyed Yet there is no real alternative - other than the sale of the natural gas that can be realistically exploited only in years.

So, as the demonstrators in Nicosia shouted with joy at the news from their parliament, there must have been some very glum faces in Brussels.

Possibly, Russia will come to the rescue. Finance minister Michael Sarris is leading talks in Moscow with Russian officials today, and he may come back with a bag of roubles. It may be either that, or don't come back at all – roubles or rubble, so to speak.

And then there is another hurdle. There is yet another day to go before the Cypriot banks open. It there is no levy in place, the government is going to find it hard keeping bank accounts frozen. But it is going to find it very hard to prevent a run on the banks.

Events will be watched very closely across the world, but nowhere more closely than in Spain and Italy. One false move to add to the many others will give "contagion" a new meaning, as cash pours out of the coffers of the banks in these two states.

This makes it hard to disagree with former governor of the Cyprus central bank, Anthanasios Orphanides. He concedes that there has been a "very serious blunder" by eurozone governments. They are, he says, "blackmailing the government of Cyprus to confiscate the money that belongs rightfully to depositors in the banking sector in Cyprus".

Orphanides thinks we are witnessing the slow death of the European Project, but we've been witnessing that for so long that one can never be sure. If nothing else, though, it is going to be very interesting indeed to see how the "colleagues" get themselves out of this mess.